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In business, even in good times when a company is sitting pretty, there is the continuing imperative to improve, to innovate, and to keep people enthusiastic and at the top of their game. It’s a daunting task, and as a result, thousands of books, millions of consultant hours, and countless seminars and teleconferences have been devoted to the topic of how to improve business performance. Yet it remains as intractable as ever.

My work as an employee, a consultant, and a writer has led me to conclude that our customary approaches may fail because they include just one, not both, dimensions of performance.

Our main focus in improving performance is focused on what I call the “outer sources” of business success. The search for emerging, more lucrative markets is one example. The quest to define and implement best practices is another. The emphasis is on what we do to improve performance. But there are also the complementary “inner sources” of business success, and these are often overlooked in the rush to master and enact all the outer sources.

The inner sources of success revolve around how we generate the energy and spirit that power stellar performance. One example is to have a clear and powerful purpose. Another is to help your employees grow.

By focusing equally on the inner as well as the outer sources of competitive advantage, we get the best human energies flowing collaboratively to power all of the great programs and processes we design. Without excellent inner energies, our actions often fail to achieve what we hope they will.

Outer Sources of Competitive Advantage

We’re all familiar with the outer sources of improved business performance. Yet we have come to expect mixed success: some companies achieve what they hoped, others don’t. Failure can result when management pays little or no attention to the inner sources of competitive advantage. Here for example are a few outer focused improvement strategies that don’t always generate the desired results:

Pursue a grand strategy.

“When we have the strategy right, the rest will fall in line.” Research shows, however, that most people (95% in one study ) in organizations do not understand the strategy and that organizations (90% in the same study) typically fail to implement their strategies successfully.

Minimize costs.

“A 10% reduction in our costs will double our profit.” That may be the simple math, but cost reduction by itself is not always productive. When costs are cut, revenues sometimes suffer and attention is taken away from increasing revenue.

Fix what’s broken.

“We’ll do better by finding out what’s holding us back and fixing it.” But eliminating problems doesn’t always work because when top management consistently focuses on what’s wrong, employees repeatedly get the message that they are inadequate. An increased fear of failure, loss of confidence, hesitancy, and even paralysis may follow, thereby weakening the company’s ability to improve.

Hire the best people.

“Having the best people will give us what we need to succeed.” This, however, is just part of the answer. It’s also necessary to decide how to make the best use of their talents; otherwise, the promise they hold will be squandered.

Inner Sources of Competitive Advantage

All too often managers set on improving business performance dismiss the inner sources of competitive advantage as the “soft stuff”: “We can’t do anything about morale, values, and culture when the business is not going well. We’ve got to get the business back on track first. Then maybe we’ll do something for the people—if we have the money for it.”

But, when a company is not performing well, how can it possibly achieve success if the people are not fully engaged. The new leader of a 3,000-person telecommunications company that was losing money, customers, star sales people, and top management focused simultaneously on both the inner and outer sources of success to complete a dramatic turnaround. In just three years they achieved striking results, including quintupled shareholder value and a level of employee satisfaction that ranked near the top of 500 companies surveyed.

Here are some of the inner sources of competitive advantage that they worked on—and that you too can capitalize on in your own company:

Create and champion a compelling purpose.

When you do this, your people will be inspired, excited, and proud to be part of the company. When not only material needs but also the nonmaterial needs and aspirations of employees, customers, vendors, and strategic partners are addressed, the whole organization is stimulated and focused. Good people are attracted to the company, contribute, and stay.

Hardwire values into the organization.

When people believe you mean it about those lofty values you’ve developed and published, they get on board. Incorporating values everywhere—in business strategies, decision-making processes, sales strategies, customer service practices, employee development and evaluation processes, and measurement and reward systems—attracts and inspires not only great employees but also great customers and suppliers.

Set big goals.

The common view is that “We don’t want to set goals too high. Let’s set them low so that people can achieve them.” But companies that work on the inner sources of competitive advantage know that when the goals are big and important—and people are called on to work together to achieve them—they will rise to new levels of performance. Successful organizations set big goals, are passionate about them, communicate why they are important, and call on people to join in the exciting process of achieving them. When people help develop strategies and actions for achieving such goals and share the good news of progress, they gain the confidence to reach even higher.

Create a climate of freedom.

Providing an opportunity for employees to enjoy freedom within structure allows and encourages people to initiate new ideas and to innovate in carrying out the company’s strategy. Conventional companies have layers of rules and controls, with a “zero defects” mentality. As a result, many employees shut down. In companies with a degree of freedom, people look forward to their work, where they are encouraged to develop new ideas and take prudent risks in carrying out the company’s strategy. This often leads to breakthroughs in business performance as well as personal and professional fulfillment.

Invest in people.

When employees see that their companies want to help them grow their capabilities and not merely exploit their existing capabilities, they feel greater dedication to their employers and contribute more. Coupling employees’ opportunities for personal and professional growth with invitations to use their new knowledge and skills leads to heightened success at the individual and organizational level.

Leadership Qualities

Just as improving organizational performance requires attention be given to inner, as well as outer, sources of competitive advantage, the leader of a company needs also to work at the inner level. That means not only making the right decisions and organizing the work, but also inspiring employees and bringing out their best. The successful leader draws not just on the power of a “superior mind” and also on the power of “superior character.”

Leaders develop beliefs and ways of seeing that inspire their people. They see the ultimate purpose of the enterprise and always keep it in mind; and they see the interconnection of all of the pieces and their effect on each other. They believe in the nobility and capability of their people.

These leaders also embody the qualities of respect, caring, and trust and have the ability to see and act on the whole. They are in touch with and act from their own sense of deepest purpose. They connect with all of the people involved in their endeavors, even adversaries, and embrace the goodness and greatness in all of the people with whom they work. They see their leadership role as a great responsibility to serve others.

In the end, these leaders realize that the quality of the relationships within and without the company and the spirit generated by those relationships determine the health and competitive standing of the organization. They build a company that respects and honors the individuals within it and that also stresses the “we” of collaboration within the company and of great working relationships with customers and vendors.

1 Source: Balanced Scorecard Collaborative

Darwin Gillett is author of NOBLE ENTERPRISE: The Commonsense Guide to Uplifting People and Profits, from which this article is adapted. Through his consulting, coaching, keynotes and seminars, he helps business executives create competitive advantage and achieve sustainable growth and profitability. To learn about his publications and services, visit Noble Business Solutions.